Retirement at Risk: What HR Must Do

Last December, the once-mighty Enron Corporation collapsed into bankruptcy with sickening swiftness, taking along with it the retirement savings of thousands of its employees. Had the company collapsed 10 years ago, the public outrage would have centered on securities issues, not retirement. But the American workforce is aging, and with aging comes worry.

Thanks to Enron, millions of Americans are now taking a closer look at their own retirement portfolios and asking themselves: Are my assets safe? Will I have enough to live on? Can I trust my employer to tell me the truth about company stock?

Because the average American worker is now older than ever, the gnawing concern over retirement would have happened regardless of Enron, says Eric Lofgren, global director of the Benefits Consulting Group at Watson Wyatt in Philadelphia. "People tend to get religion about retirement when they hit 50," he says. But the collapse of Enron vastly accelerated the public’s anxiety about their retirement assets. As a result, retirement is no longer a simmering back-burner topic reserved for Congress and financial planners. It’s a boiling cauldron of issues that sits squarely in HR’s domain.

Enron is not the only employer whose defined-contribution plan has left employees high and dry.

To understand the shifting nature of retirement, consider these facts. Today, one baby boomer turns 50 every seven seconds, and the number of American workers over age 40 is higher than it’s ever been. Given an age distribution like that, it’s only natural that there would be heightened insecurity about retirement. But the public’s concern is not solely the result of age. It’s also due to a perfect storm of intersecting forces that threatens retirement security on several fronts, starting with the stock market.

At year-end 2000, some 42 million workers had 401(k)s, with combined total assets of $1.8 trillion, the majority of which was invested in stock funds. Because of the precipitous market downturn that began that year, the average worker’s 401(k) balance declined for the first time ever, from $47,000 in 1999 to $42,000 in 2000. After years of gleeful double-digit increases, the decline has been a sobering reminder to Americans that Wall Street isn’t a sure bet.

This reality is compounded by the fact that many employers, including Ford Motor Company, DaimlerChrysler, and Bethlehem Steel, have stopped making company matches to employee plans. Instead of boasting to friends over lunch about how much their stock funds have grown, workers are now bravely comparing their losses. Bragging rights go not to those who’ve made the most, but to those who’ve lost the least. Suddenly, the stock market has lost much of its allure as a haven for retirement savings. The abrupt downturn of the stock market combined with the collapse of Enron has made workers everywhere question the wisdom of loading their portfolios with company stock -- and for good reason.

Enron shares accounted for almost 60 percent of the company’s 401(k) plan. This was not only because faithful employees willingly loaded their plans with the stock, but also

because Enron made all matching contributions in its own stock. When the company’s shares plummeted from $90 to 26 cents in just 14 months, thousands of employees enrolled in the plan were left with next to nothing in their retirement portfolios. Many of them couldn’t have done anything about it even if they’d wanted to, because Enron’s plan prevented employees from selling the shares they’d accumulated until age 54.

Enron is not the only employer whose defined-contribution plan has left employees high and dry. Workers at Lucent Technologies have seen their stock savings evaporate with a 90 percent plunge in stock price. At Coca-Cola, where 81 percent of 401(k) assets are invested in Coke stock, employees have suffered a 49 percent price decline. And a class-action lawsuit has been filed by workers of Rite Aid Corporation who allege that officials of the company engaged in a scheme to manipulate the price of Rite Aid stock and allow the sale of unregistered shares to employees.

Cases such as these have made the public painfully aware of several things: 1) that defined-contribution plans are not insured; 2) that investing in company stock is not necessarily a good thing; and 3) that employers may not always have employees’ best interests in mind when it comes to managing 401(k) plans.

Because of the Enron debacle, some consumers are crying for the return of more secure traditional pensions, known in the trade as defined-benefit plans. But these plans, which are complex and costly to administer, have fallen out of favor in corporate America. Between 1985 and 1998, the number of defined-benefit plans offered by companies in the United States dropped from 112,000 to 42,000, according to the Pension Benefit Guaranty Corporation. "Employees may want these plans," says Olivia Mitchell, professor of insurance and risk management at the Wharton School of Business at the University of Pennsylvania, "but employers don’t want to get back into the defined-benefit arena."

Social Security jittersA third issue that’s making employees skittish about retirement is the vulnerability of U.S. Social Security. The system was set up as a pay-as-you-go plan in which payroll taxes paid by current workers are used to fund benefits for current retirees. Thanks to the decline in the birth rate, there simply won’t be enough younger workers in the pipeline to support the benefit requirements of the enormous number of baby boomers set to retire in the next two decades.

Social Security won’t, as is widely believed, ever go bankrupt, because there will always be people paying into it. Starting about 2016, however, benefits will likely be cut, probably to around 70 to 73 percent of current levels, because the money coming in will not be enough to meet benefit needs. Social Security doesn’t pay much to begin with: currently an average of $874 a month. And so a 30 percent drop in benefits is significant.

Added to all the worries about Social Security, 401(k) plans, and stock market volatility is the sad fact that an alarmingly high percentage of American workers don’t have nearly enough saved to stop working at the traditional retirement age. More than a third of American workers are not saving for retirement at all, and the average worker in her fifties has set aside just $95,000, an amount not likely to last beyond five years, even in a best-case scenario, according to the Employee Benefit Research Institute.

Are employees clueless? Perhaps. But a more likely reason why people aren’t saving enough is that they don’t understand the complexities of retirement planning. "I’ve gotten calls from people who say, ‘I’m retiring. How do I get a pension?’" says Mary Ellen Signorille, senior staff attorney with AARP in Washington. "It’s stunning that people could reach retirement age not knowing if they have a pension or not."

The confusion is not limited to workers at the lower end of the pay or education scale. "We have Ph.D.s working here who don’t understand the difference between a defined-benefit and a defined-contribution plan," says Laurel Beedon, senior policy adviser with AARP’s Public Policy Institute.

Even more unsettling are the widespread misconceptions about stock investing. A recent study by The Vanguard Group reveals that Americans erroneously believe investing in their own company stock to be safer than investing in a diversified stock fund. The average investor is also overly optimistic, expecting the stock market to return 15 percent annual gains, a level that is well above historical stock market returns, which have averaged 10.7 percent a year since 1926. Grimmer still, nearly one-fourth of respondents to the Vanguard study believe that stock prices will rise 30 to 100 percent a year over the next two decades. "This shows that people have no clue about how to think about risk and return," Mitchell says. Furthermore, although the key to surviving stock market ups and downs is having a diversified portfolio, the average person is invested in only 3.3 funds out of a possible 8,282 mutual funds.

Put all this together and what you realize is that people who grasp the issues surrounding Enron, the stock market, Social Security, and 401(k) plans are understandably nervous about their retirement income. As a group, they’re seeking answers -- and reassurance -- from their companies’ HR executives. But there are also plenty of people who are so confused by the retirement miasma that they’re not even sure what questions to ask.

What HR must doWith little in the way of major help expected from Congress anytime soon, the responsibility for demystifying the retirement system and managing the public’s insecurity falls squarely on the HR professionals who manage corporate retirement plans.

In the short term, it behooves HR people to review the requirements of their company’s 401(k) plans. Are employees required to hold so much in company stock that they would become vulnerable in the event of an abrupt downturn? Do lengthy vesting periods also put employees at risk? Is there a means to give workers plenty of notification about lockout periods? While there are federal guidelines concerning the administration of 401(k)s, it’s a good idea, in light of Enron, to see if any amendments can be made that would ease employee fears.

Have an open, honest, and ongoing dialogue with the workforce about retirement planning

Conducting a thorough plan review is only a tiny part of what must be done. There’s also the issue of liability to consider, says Alvaro Anillo, of-counsel with Groom Law Group in Washington, D.C. "Since the passage of ERISA, litigation over plan investments in employer stock has been by far the biggest category of litigation," he says. "Not surprisingly, the number of cases goes up in direct response to declines in the stock market."

This year, a large number of employer stock cases have been filed by classes of plaintiffs and the Department of Labor, including three class-action suits against Enron. Many of these cases allege the same thing: that corporate officials breached their fiduciary duty by providing participants with misleading or inadequate investment information.

Some of the changes that Congress is considering may protect companies from such lawsuits in the future. These include putting a cap on the amount of company stock that can be invested in a plan, and allowing employers to provide investment advice without incurring liability. In the meantime, one of the ways employers can protect themselves and their workers is by appointing an objective, external fiduciary to manage defined-contribution plans, says Lonnie Hassel, a principal with Groom Law Group.

By far the best way to minimize the risk of lawsuits and help employees plan for the future is to have an open, honest, and ongoing dialogue with the workforce about retirement planning, says James Delaplane, vice president of retirement policy for the American Benefits Council. "You have to be as creative as possible in designing communication strategies that will reach every worker."

One of the problems is that over the last several years, there has been a proliferation of many different kinds of programs, including 401(k)s, employee stock ownership plans, and stock option plans, Mitchell says. As a result, employees are not always clear about how the plans differ and how they can support them in their retirement. Employers must clarify this.

"Employers also have to educate employees about diversity and asset allocation," says Mary Sue Wechsler, managing director of the International Foundation for Retirement Education, based in MacLean, Virginia. "I don’t know what Enron did or didn’t do by way of education, but clearly, the messages weren’t received if people lost the kind of money they did."

Employers shouldn’t just mail out brochures or establish a Web site and consider the educational challenge fulfilled, she adds. "You have to have a way to measure that the education is being received. Are people asking more questions? Are they diversifying their investments? Education is not enough," Wechsler emphasizes. "You have to get people to take action."

A recent study by Cigna Retirement and Investment Services reports that 40 percent of HR executives consider educating the workforce about retirement benefits to be their biggest challenge, yet 47 percent of them feel unprepared to give advice about investing. Under the terms of a recent ruling by the Department of Labor, companies can now structure their 401(k) plans to allow individuals to opt for managed accounts in which a paid financial professional divvies up the employee’s 401(k) assets among available investments on the basis of age, assets, and ability to tolerate risk.

While passing the buck to financial planners may seem attractive to employers who are struggling with the issue of retirement education, HR professionals may want to think twice before providing such a service. In its ruling, the DOL said that nothing has changed with respect to company liability for 401(k) plans. Mitigating a company’s legal risk obviously is important in managing retirement plans, but there are also moral obligations to consider and confront. Several years ago, Unisys Corporation offered workers a 401(k) plan, and one of the investment options was a guaranteed insurance contract, which works somewhat like an insurance company bond. Employees invested a lot of money in the GIC before the insurance company with the assets got into financial trouble, Mitchell says. Plan administrators at Unisys were aware of the trouble and knew that the GIC was losing money.

"They talked about it at great depth and decided they would get into trouble legally if they advised participants that the fund was losing money, so they opted not to," Mitchell says. "The insurance company went broke, and participants lost a lot of money." The employees then sued Unisys, saying the company hadn’t advised workers about the fund’s financial instability. Federal judges ruled that there was nothing untoward about what Unisys had done.

The fact that Unisys was legally in compliance was hardly reassuring to employees who’d lost a good chunk of their retirement savings. It’s too soon to know if a similar outcome might occur in the Enron cases. "Because as far as we know," Anillo says, "all the rules surrounding the Enron plan were perfectly legal."

"A defining moment for HR"While the courts battle it out, corporate HR professionals must consider that employee retirement is not just a legal issue or a benefits issue. It’s also an issue of trust in the workplace.

"HR professionals must look at the integrity of their company’s business processes and be willing to challenge things that appear wrong," Lofgren says. "I’d even go so far as to call this a defining moment for HR. HR professionals simply must take responsibility and set limits as to what kind of behavior will be culturally acceptable in a company. It’s up to them to decide if such things as conflicts of interest or putting one over on someone will be allowed."

Signorille adds that one of the biggest fallouts of the Enron debacle is employee distrust. "Employees want to know that the information they are getting from management is correct, truthful, and what they need, and it’s the job of HR to provide that reassurance."

Now that retirement has emerged as a hot-button employment issue, it’s up to HR to respond to it. And if Enron’s disaster prompts HR to become more responsive and employees to become more responsible about retirement, then some good may result from its colossal collapse.